How trading works
Trading relies on the unique features of online betting exchanges, which have continued to grow in popularity since their introduction in the early 2000s.
Online betting exchanges like Betfair make it possible to place both “back” and “lay” bets. In other words, you can place a bet that a particular outcome will occur or, in the case of a lay bet, bet that the outcome won’t occur. In addition, betting exchanges enable punters to set their own prices, or odds, for selections. Other punters can then choose to place bets at the odds you’ve set.
Trading involves placing a back bet and a lay bet on a single selection at a sports event. The two bets can be placed in any order, but the most common strategy is to start by backing a selection at high odds. Once the odds have dropped low enough to guarantee a profit (or at least prevent a loss), irrespective of whether the selection wins the event, you place a lay bet on the selection.
Say Manchester City is priced at 14/1 to win the Premier League in the pre-season outright markets at Betfair. You take advantage of these generous odds to place a £100 bet on the team winning the Premier League. Over the next three months, Manchester City performs well and odds on the club winning the Premier League drop to 5/1. At this point, you lay a £200 bet on Manchester City losing the Premier League. In combination, the two bets mean that if Manchester City wins the Premier League,
- the back bet you placed at odds of 14/1 will generate a profit of £1400
- you’ll lose £1000 on the lay bet of 200 that you placed at odds of 5/1.
The net result for you is a profit of £400 (calculated as £1400 – £1000). If Manchester City fails to win the Premier League, the two bets will have these results:
- you’ll lose your stake of £100 on the back bet
- the lay bet will generate a return of £200.
This means that if the team loses, you’ll still net a profit of £100 (calculated as £200 – £100).
Trading in practice
In practice, traders rarely wait for substantial decreases in odds before placing lay bets because odds can fluctuate wildly in a matter of hours. A one- to two-point drop in odds is usually sufficient to guarantee an overall profit at minimal risk. Many traders choose to make small profits at lower risk than to expose themselves to greater risk in the hopes of securing high-profit trades.
Trading risks and minimizing your losses
With trading, there’s the risk of odds on a selection drifting rather than shortening over time – potentially making it impossible to hedge your risk on a back bet that you’ve already placed at high odds. Accordingly, it’s important to have a strategy in place for limiting the losses you could incur.
Many traders determine the maximum odds at which they’re prepared to place their lay bets. They then place their lay bets as soon as the odds reach this level. Using this approach, rather than continuing to wait in the hopes that odds will drop further, helps reduce the potential for serious losses.
As an example, say Manchester City begins the Premier League season priced at odds of 14/1. You place a £100 bet on Manchester City winning. You expect odds on the club to fall sharply as the season progresses. Two months in, however, lay odds on the club have risen to 16/1, due to unexpected poor performance and a spate of unlucky injuries. At this point, it makes sense to “close out” the trade to minimize your potential losses, rather than waiting in case the odds fall. If you place a lay bet of £100 on the team, it means that
- if the team unexpectedly wins the Premier League, your back bet will win £1400 and you’ll lose £1600 on the lay bet, resulting in a net loss of £200
- in the more likely event that the team fails to win the contest, you’ll forfeit the £100 stake on the back bet but win the lay bet, breaking even for the trade.
Setting a price to lock in a trade
One of the major advantages of using a betting exchange is that you can set your own prices. This means you can decide beforehand what sort of profit you’re hoping to secure through trading.
For example, say you back Manchester City to win the Premiership at odds of 14/1 with a $100 bet. Having secured a high-value back bet, you set about determining possible profit and loss margins in the event that the odds either contract or drift. You decide that City is unlikely to win the Premiership, but that good early season performances are likely to see the club’s odds contract significantly. You therefore place an unmatched lay bet of £120 at odds of 10/1 on the betting exchange.
If Manchester City performs as expected, odds will soon decline and the lay bet will become visible on the betting exchange once prices hit this range of odds. At this stage, there’s a high probability that your odds of 10/1 will be matched by other members of the exchange, guaranteeing a profitable return on the trade irrespective of City’s performance from that point onwards.
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